debt in canada

When Debt Is Not A Four Letter Word

  • By Bonnie Hooley, LIT

If I proudly told you I had a plan to get further into debt, you would likely not look too closely at me as your next financial advisor. You might even think I wasn’t thinking too clearly. The reason for this is that when most people hear the word debt, it conjures up bad feelings. We put debt in the category of other bad four letter words. Something to stay clear of.

I am hoping to change your perception of debt through this short article. Hoping to possibly convince you that debt can be good! I am also hoping to provide you with a sobering respect for debt.

I have not lost my mind. I am merely pointing out that not all debt is the same. There are different types of debt. Debt falls into a few different categories, good debt and bad debt to put things very simply. Unfortunately, good debt and bad is not that easy to identify because the way you use debt is critical.

Let’s Start With Some Basics.

Traditionally good debt is viewed as something that has the potential to increase your net worth, or will provide future value. Standard examples of this could be a mortgage on a house, or a loan for an RRSP. While those debts are not always good investments, they are traditionally viewed as the type of debts considered as good debts.

The types of debts generally viewed as bad debts, are debts for items that would be consumed or rapidly depreciate in value. Debts wherein, after the loan, you have nothing to show for the debt except an outstanding bill. Credit card debts are often used as an example of bad debt.

Regardless as to whether you identify the debt as bad or good, how you use debt is critical. Debt which is generally considered good, can cause financial failure if not used properly. In the alternative, debt generally considered bad, could be used to your advantage.

Let’s start with an easy one.

Buying a home can be a great investment. If you purchase the home when the market is low, money you would otherwise be putting toward rent can be used to pay the principal and interest. After a few years you may actually have something to show for the payments you made. You will own a property that has increased in value and whose principle has been paid down with funds that would have otherwise gone toward rent.

A home mortgage – good debt right? Usually, but not necessarily.

Many people will buy homes that they cannot afford. They qualified for the mortgage so made the erroneous assumption they could afford the home. There can be many hidden costs in a home purchase that people don’t always plan for. Aside from the cost of the move, there may be minor repairs they weren’t expecting. Also, if you have never owned a home there will be yard maintenance expenses that you have to put out funds for, lawnmowers, shovels, etc. If you don’t budget to set aside money for repairs, upgrades and maintenance you could run into trouble.

Then there is always the interest rate. If interest rates increase, you could find your house unaffordable when it is time to renew your mortgage; being forced to sell when the market has dropped.

While careful planning and good fortune can make a home investment a good debt, you must use caution. It is never a good idea to buy the most expensive house you can get a mortgage on. That leaves you with no wiggle room if interest rates improve, or the housing market goes down.

Let’s try another example.

Credit card debt is bad…..right? Usually, but not necessarily.

The interest you pay on a credit card is generally ridiculously high. We have all seen the credit card statement showing that if you made the minimum payment they are asking for, your card will not be paid off for many years to come. If you take that one step further and multiply the minimum payment by the number of months and compare that total to the original amount owing, you would see that in the end, you would pay for that item more than 10 times over.

Equifax reported in March of 2023 that credit card debt in Canada is more than $100 billion dollars! That is a Billion with a “B”. Numbers too large for most of us to fathom. This means the large majority of Canadians are carrying bad debt on their credit cards.

Standard credit card interest is around the 20% mark and is generally compounded daily. Sure you can get lower rates and higher rates, but however you cut it, paying interest on a credit card is never a good thing. Also, most people using a credit card are charging more on the card than they pay off each month. Basically, living beyond their means. Once caught in the credit card interest rate trap it can be difficult to get out of.

Can a credit card be considered good debt? Possibly. If the situation is right.

There are still credit cards out there that do not charge an annual fee. If that is the case, then you have use of the credit card funds for 30 days at no cost to you. So how can you benefit from that?

If you spent an average of $5,000 a month on your credit card and paid it off at the end of the 30 days you have basically deferred paying the original $5,000 indefinitely. If that $5,000 was invested in an interest bearing account, the debt on your credit card could actually allow you to earn interest on your investment. Good debt.

Then there is that gray area.

There are a lot of gray areas when it comes to debt. A vehicle loan is a perfect example. Some would argue that a vehicle loan is a bad debt. The depreciation on the vehicle and all the additional costs related to owning a vehicle do not generally increase your net worth. Others will defend a vehicle loan as a good debt. If you purchase a vehicle as an investment to generate revenue or income, a vehicle has the potential of increasing your net worth.

What else should you consider?

The final consideration is to remember that not everything is under your control. Some have bought houses they couldn’t really afford, yet have lucked out by an upswing in the market and made money on their investment. Others have carefully counted the cost, bought an affordable home as a sound investment, only to lose it when matters out of their control have led to business failure or extended job loss.

Licensed Insolvency Trustee, Bonnie Hooley weighs in on good debt vs bad debt and whether there can be a distinction made between the two.

So, should debt be a four letter word?

There is good debt and bad debt. What defines debt as good or bad is not the debt alone. It is also how carefully you analyze and manage the debt.

There will be times when regardless of how carefully you plan and manage, life happens. What you thought was good debt can spiral out of control and try to take you with it. When that happens you need to seek out a Licensed Insolvency Trustee for advice.

At LCTaylor & Co. Ltd. Licensed Insolvency Trustees, we have helped many people whose debt has started to work against them. Often, if they seek help soon enough we can help them avoid Bankruptcy. Having said that, there are also times when the safety net that a Bankruptcy offers is a good solution for turning your financial situation around and getting back on your feet.

The takeaway.

Don’t look at debt as a nasty four letter word. Instead, consider thoughtfully how with good planning you can use debt to improve your situation. Approach debt with a healthy respect for what can go wrong. Most importantly, remember that even the best made plans will hit a roadblock now and then. If that happens there are Licensed Insolvency Trustees ready to give you a hand.

Bonnie Hooley, LIT

Bonnie has worked in the insolvency field since 1980. She is a graduate of the University of Manitoba, with a degree in Social Work. In 1999 she attained her license as a Licensed Insolvency Trustee. Bonnie has her Foundation Studies in Accounting from the Certified General Accountants (CGA). She is Read More Bonnie has worked in the insolvency field since 1980. She is a graduate of the University of Manitoba, with a degree in Social Work. In 1999 she attained her license as a Licensed Insolvency Trustee. Bonnie has her Foundation Studies in Accounting from the Certified General Accountants (CGA). She is a member of the Canadian Association of Insolvency and Restructuring Professionals (CAIRP) and Past President of the Manitoba Association of Insolvency and Restructuring Professionals (MAIRP). Bonnie has served on various boards within her community. Her hobby is quilting, her passion is Christ. Close


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